as you well know everyone is obsessing over the fiscal cliff from the press to politicians working on a deal to this seventy three percent of conference participants at the wall street journal's c.e.o. council in washington who reportedly said it is their primary concern now while everyone is focusing on how to avert a recession and have their eyes on president obama's press conference today for clues about averting the proverbial cliff was there another hearing on capitol hill that was far more under the radar but dealing with another issue entirely give us an indication of where the economy is headed the stronger capital standards in our proposal would significantly lower the probability of banking crises and their associated economic losses. maybe that didn't look as sexy is obama's press conference or as the fiscal cliff discussion seems but that was from

a hearing of the senate banking committee on the balance all three bank capital rules and that gentleman was talking about how important they are for good reasons but our guest is here to tell us why this issue has such a bearing on the economy and is so important to a discussion about its prospects and could be a very dangerous thing from our new york studio is chris whalen senior managing director at tangent capital partners and author of the book you see here inflated and as always chris whalen thank you so much for being on the show really appreciate you being on more pleasurable or ok so basil three as the man in the hearing said the stronger capital standards proposed under these rules would significantly lower the probability of a banking crisis and their associated economic losses i would tend to listen to him and say yeah sounds great sounds and sounds right last week regulators delayed the timeline for basil three you say this is because they realize that this was going to put the western economies into a prolonged recession how so how does how does making banking safer equal love

recession recession a prolonged one at that. well i think the chief fallacy of the basel three process is that a lack of capital caused the crisis in fact the issuance of bed fraudulent securities and the really disintegration of investor confidence is what caused the crisis no amount of capital would have helped us in two thousand and seven so in response to the crisis the regulators the congress have all been talking tough on bank capital as though that was a problem when i think in fact it was just the opposite it was other problems in the in the industry especially fraud so today you have this weird situation where we're going to increase capital levels in banks which means they're not going to lend as much and this in turn is going to hurt the economy because we're going to have less credit available to what extent that to what extent is asking banks to

require a little more capital and really mean that they're going to stop lending to the extent that we would see a prologue to recession well it's a whole number of pieces of fit into this puzzle but if you took bank capital just a change in the demeanor of regulators over the last couple years the new rules for getting guarantees from various government agencies for mortgages all of these changes have essential he added friction in the economy decreased to bail ability of credit and we need don't have as much credit being created obviously you're not going to have a good job market so i think that we're kind of cutting our nose off to spite our face we're trying to talk tough on capital on the one hand and at the same time you have this debate about the fiscal cliff and everything else i wrote a piece that we posted on zero hedge today talking about this dichotomy because we can't do the right thing on fiscal issues we have bad housing policy that causes wall street to just about collapse and yet we're going to talk tough on bain

capital is was one nine hundred eighty i think we got to do a bit of a sanity check here and try and. crater the economy in terms of growth rates while we slowly get the fiscal house in order you were just talking about a bill a trillion six and the revenue increases that the president wants you know the reality is no matter what deal they cut on the fiscal cliff lauren it's going to hurt the economy because we've been goosen growth by using debt instead of tax revenues to pay our bills so if you start taxing more obviously the economy is going to slow down of course but my question on that is everybody is so worried about the fiscal cliff and it's understandable why c.e.o.'s would be worried they're focused on short term profits they see a recession coming and they go this is bad for business but why would it be so bad for the economy if we have a little recession next year but longer term are on a better path because we've got on the fiscal house more in order in the us well i think you want to do these things gradually if you raise dividend tax rates over

forty percent you're going to change the city allocation behavior of a lot of fund managers on wall street and you're going to have carnage in the equity markets as a result i think you want to do these things slowly and deliberately so you don't scare people even more than there are already scared today and try and get a precipitous political way but i got to tell you i am very skeptical that the republicans and the democrats are going to come together short of some sort of apocalypse in fact i think the republicans would rather go over the cliff and then blame president obama with the results because this was kind of his idea and why not let him take ownership of it if they do go over the cliff i'm curious because from the perspective of ok middle class americans if their income tax rates go up if the payroll tax expires if that happens if that happens say to me i would see a little less in my paycheck it would be a bummer i'd be upset i probably would have to cut some corners here or there it

wouldn't be the end of the world so we're going to have our names would come ok so so that's why it's so so here's me saying now but what it what do you. is the broader consequence because you just mentioned carnage in the equity markets and dividend taxes go to forty percent which is the tax rate they would go up to if we go off the cliff so so where do you think the carnage would really be in january if we went off the cliff just right away with there being well i think in terms of the business community the uncertainty would continue because people would believe that at some point the congress would go back and fix it in other words they would change the tax laws again i think the real problem here lauren is that we've been in a short term sense trying to extend and increase nominal growth nominal job creation for so many years that if you start to really tax this economy at eighteen or twenty percent of g.d.p. instead of fifteen were tax revenues are today you're going to take so much income out that you've got to see job losses you've got to see a decrease in consumer spending that i think would guarantee that we're in

a recession but let me put it to you this way even if we have a short term deal that pushes this issue down the road a few months or a year what have you i still think two thousand and thirteen is going to be slow because of her dubious about the housing sector you alluded to that before and i think in general there's such tight credit availability in many markets that it's almost guaranteed i think that we're going to have growth below what people are estimating right now ok and i want to get into housing a little bit later but but what you just mentioned about tight credit. ok you're saying credit is tight how tight is it right now and we don't have tighter capital requirements so i don't want to say i'm making credit so tight right now well most banks if they're making mortgage loans ninety percent of their volume is getting guaranteed by the federal government to get that guarantee without a lot of fees and private mortgage insurance you're looking at a minimum five go score for the borrower of about seven forty and you're look at it

an eighty twenty load in other words twenty percent down on the house and the agencies really want to see thirty percent down so. what that means is that about half of the total population of potential home buyers out there cannot qualify for government guaranteed loans now the banks are not really writing an awful lot of conform conforming loans now in other words loans they would keep on their books and take the risk on as opposed to a government guaranteed loan where the bank really doesn't take any risk the risk if pushed to washington so right there you can sense that the banks are not taking a lot of risk they don't want to take risk and it means that there's a very large percentage of the total population out there they really can't be the refinance or existing mortgage or get a new mortgage on a new home purchase in some states california the southwest some parts of the southeast the markets are doing pretty well but here in the northeast basically from new york on up into new england we still have a huge problem because these are all states where you need

a judge to bang the gavel in or do a foreclosure so if the recovery in real estate is very very regional and i think by the end of the year we were january february timeframe we'll probably see the case shiller home index numbers going down again and that because right and that's what educators people are looking to saying housing is improving before we get to housing i do want to just finish up on this three this discussion because we got away from that but how would it have been different in two thousand and eight if we had higher capital requirement because you're saying it wouldn't have mattered but if banks had more capital and a liquidity crisis does not mean they would have more liquidity because capital is cash and things that can be easily liquid right so that would have helped. well lauren on the day or net period of months during the crisis nobody had liquidity even government agency paper was very difficult to sell and you couldn't use it as collateral so this whole notion that there would have been liquidity available i think is specious the more important thing is remember the basel framework basel

two essentially enabled the crisis because it said to people. if you create a bond and you get a aaa rating from moody's no matter how crappy it is inside then it has a lower capital weighting that alone so what we've said to wall street is sell bonds and they did and they gauged all kinds of fraudulent activities that have largely gone and punished so where was it in this whole series of events that we needed more capital what we needed was a much tighter regime on the creation and sale of securities but nobody wants to talk about that if you look at loan loss rates in the banking industry say from zero seven forward they were very high but we had plenty of capital to absorb them u.s. banks have twice sometimes three times as much capital as their european counterparts so it really is i think a false argument to say that higher capital levels would have constrained wall

street because they still would have issued all those bad securities ok so you're saying they would have issued bad securities but they wouldn't necessarily be lending to the average joe schmoe without fear that one of the arguments was that it wasn't fully implemented by two thousand and eight but by two thousand and eight it had been lowering capital requirements and so capital was less that's another reason why people say made well i think rice is worse is that right and the let the right to leverage ratio in the u.s. which is just capital versus total assets is really the reason that u.s. banks are in better shape most u.s. banks never got to the basel limitations floor and they usually run into their leverage ratio limits for sed that's what people don't realize basel really applied in a significant way to large banks because it let them play games with different kinds of risk waits for assets for your typical bank to leverage ratio was to governing rule ok well we'll leave it there for now but when we come back we're going to talk much more about housing and this idea that there's a so-called recovery uganda

a little bit of it we're going to have a lot more after the break with chris whalen of tangent capital partners also stay . ahead we've seen college tuitions go up as stated become cash strapped in the u.s. but could universities load and bureaucratic budgets be part of the problem we'll explain in tonight's loose change but first your closing market numbers.

you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else hears you some other part of it and realize that everything you thought you knew you don't. charge was a big. welcome

back let's switch gears and talk about housing as c m b c had lying caught my eye today it said could housing be the antidote to the fiscal cliff i don't know some people probably hope so there certainly seems to be this consensus building around this idea that us housing is we're covering sounds like our guest has a lot of reason to say not so fast guys let's hear why chris whalen senior managing director from tangent capital partners will explain so chris this article was was talking about the chief investment strategist at charles schwab who is saying that the economic recovery is going to be built literally with four walls it's housing

it's it's it's recovering and it kind of as this consensus it seems like it is building around this idea that the u.s. housing market has turned in his recovery is it. no i think go the way we're going to define recovery is that prices are going to stabilize in some markets where you have a lot of either investor activity or just local demand you're going to see prices go up single digits but the days of housing i think is the dominant most expansive part of the u.s. economy which it was for quite a number of years i think or over there's just so many headwinds as my friend josh ross or likes to say that used to be tailwinds number one being demographics the baby boomers are looking to live in florida now and they have a lot of homes that they want to sell here in the northeast the northeast is by far and away the part of the country that's going to feel least of benefit from any recovery in housing simply because we have still years of backlog in terms of

foreclosure states like connecticut or just a disaster especially the higher end homes above the the maximum amount that you can get a government guarantee which is about six hundred thousand dollars there is no no loan market for these homes so you're basically waiting for a cash buyer states like connecticut for example where you are massachusetts excuse me where you can't foreclose well what investor is going to want to write a loan in massachusetts so i think that you have to be very careful and look at different regions of the country and they're going to have very different performance characteristics i don't expect to see housing pulling the u.s. economy forward the positives are low energy prices the export sector some other sectors of the economy they're doing relatively well but if the job market doesn't come back lauren then that's what's really going to weigh on housing people renting instead of buying and then that's going to be a very tough situation to just soak up all of that inventory that we have and so

many of these markets will speaking of ever i mean that's one of the things that we here are private equity investors getting in buying houses to rent them kind of a new way to say are desperate strategy. a lot of talk behind this and i know there is actually you say in some markets this private equity money is actually creating bubbles but that can this kind of money this kind of homebuyer fuel a recovery because in the past it hasn't been investors or even first time buyers that have driven the bread and butter of housing in the us hasn't been just mortgage homeowners that move every six to eight years into another home yes and no i mean if you looked at florida if you look at arizona those markets there was a lot of investor activity in the past this time around you have private equity funds soaking up the excess inventory often at retail valuations and i'll tell you right now i don't think the investment thesis works there real estate especially rental properties or a local business it's very hard to run that on

a national basis and i think that a lot of the expectation is for a double digit returns on cash from rental investments by these private equity firms are going to prove to be wrong well then what does that mean in these areas that you say private equity money is actually creating a bubble in some regions what does that mean of these as these investment schemes don't turn out to be what they had hoped well it means that someone bought that house which is good so in that sense look at arizona very classic example prices have been going back up and that's in part because you had an awful lot of investor dollars hit the market and very quickly push prices from deep discounts to premiums overall for prices i don't find that very attractive but you know the real pain there will be felt by the investor the short term benefit is that the housing market tightened up same thing with southern florida parts of the west coast parts of the east coast of florida about halfway up but then the top half of the state is

still a wasteland nobody wants to touch it and you see the same sort of things up and down the east coast certain markets that are attractive have bounced back a bit but by and large the dearth of financing. lower population are the smaller population of potential home buyers and other factors i think are going to limit the gains you're going to see in housing it's going to be a single digit proposition i think both ways so like i said before i would expect to see housing prices soften once we see the case schiller numbers for october november december simply you know for no other reason and seasonality but also i think because you know the spurt we saw this year has slowed considerably since what about what about shadow inventory what about foreclosures that have not been gone through with yet i mean what is the reality of this backlog that is still hasn't been put out on the market or has been foreclosed on or works through because there is some sort of some of these reports of a tight supply in some areas is that they're not sure tight supply and this is

deliberate the banks like to take their time on foreclosures they're in no hurry in new york or new jersey or connecticut because they know that the market is limited so between the delay in the courts plus other factors for every house you have for sale today what i tell my clients is there's another house just like it waiting to come on the market if prices do go up these are discouraged sellers who wanted to see prices go up voluntary sellers monday right but then there's probably another house just like that that somewhere in process between default and the final foreclosure the debate can't sell yet we have an awful lot of of inventory that you can't even see because until the judge bangs the gavel the bank doesn't own the house and they don't count it as part of their statistics so even though it is a default and even though the homeowner may have left or the bank may have told the homeowner to stay in the house until they finish the foreclosure process eventually

those homes are going to be hit in the market and you see this with the government agencies to the f.h.a. fannie and freddie have enormous inventories of unsold homes that they're trying to read write down. and that's kind of the. dirty little secret they're pushing the literal market in the hope that they don't know if the real was lost by selling the house at a substantial distil all right chris whalen bringing us dirty little secrets and shattering the conventional wisdom on housing really appreciate you being here thanks so much chris whalen is already going to a lot of back there tangent capital partners. let's wrap up with loose change first dimitri one thing that was sticking out to me

when chris whalen was so bearish on housing in the northeast i think they have hurricanes now the furthest profound people are going to live there are actually true when you talk about that all the time i was joe i'm joking because one of the los angeles where there's no hurricanes just earthquakes and they've been saying the big one was coming for a long time in california i should know i've lived there and talking i don't was and i was in the volcano movie there was a volcano you are in or out of a movie reference for everything i told you that was one of his troopers of all. and i don't think that's probably enough but let's move on to an actual story that we do know about we all know in these economic times the middle class is hurting college students are hurting they faced staggering numbers of student debt took. one in ten families that has student loan debt now owes nearly sixty two thousand dollars seven thousand dollars more than just three years earlier total u.s. student loan debt has surpassed one trillion dollars. that's those are some

staggering statistics what might be contributing to them we know that tuitions costs have gone up we know that states have cut funding and so it's schools have to charge more in cash strapped states and what could be complicating this ministry of cost are those bloated have those become more bloated the overall statistics show that they've increased i think ten fold over the last several years. and now some professors are revolting at purdue they're revolting because they're saying hey this is not right it misread it costs are soaring they have all these high paid administrators and yet we are not hiring more faculty and we're supposed to not be gouging students i mean i think this is interesting because we often talk about bureaucracy with the government but public universities is i mean it sounds like a similar issue or something is true of hospitals and i just. came to my house and it is true cost keep going up and up so you think of a ha you think of hospitals

a place you go for health care you don't realize there are so many administrative costs that are leaking into that and i want to have to do with regulations and all sorts of other overhead that wasn't there before so i think it's interesting i mean you know i'd like to see what the total breakdown is there's a write down i had on an article that i can find out so let's move on to pepsi it's released a new drink in japan with the promises that will help soda drinkers lose weight. it's pepsi as we know it today and just. in the commercial she's special and to claim it just might make us goodness you place. so they put some ingredient in it that to me just sounds like they put it in so they could say that they have a new fat blocking soda it's released in japan my question why is it released in the us the us totally goes for these kind of weird diet schemes why i just thought of this literally because i try to come up with something on the spot this could

relate to monetary policy lauren i think that this is part of the great japanese the what is should we used to eat in floyd north again way now we're eating so we will lose weight right so so now this pepsi goes you know this pope's pepsi with this giant you know hunk of lamb or duck for gras. morning fog or as a legal well because of regulation i don't read anywhere so i want to thank my that i want to go to california in the fog won't keep you there but i think this is the way of the future drink you drink pepsi you lose weight it's not diet it's literally deflation of. the flesh very color for a deflationary economy took him two decades to come up with that that's how long. that was going all that was getting over the comedies of the place and it was clever i'll give you that and i will give you our final word because that is all we have time for thank you so much for watching be sure to come back tomorrow and in the meantime you know you can follow me on twitter and you can like our facebook

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